United States taxation of dividends received by domestic corporation from foreign subsidiaries;

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This article concerns planning to get the maximum foreign
tax credit by timing dividend distributions and points out
some problems in the calculation of that credit. It is
adapted from a paper prepared for New York University's
20th Annual Institute on Federal Taxation.
DOMESTIC CORPORATIONS receiving dividends from foreign corpo­rations
are allowed to claim foreign income taxes paid or "deemed
paid" as a credit against their United States income taxes. A domestic
corporation is deemed to have paid foreign income taxes which have
been imposed upon a foreign corporation in which it owns at least
10% of the voting stock, in proportion to the amount of dividends
received from the latter's "accumulated profits." Similarly, where
that foreign subsidiary owns at least 50% of the stock of another
foreign corporation from which it received a dividend, the domestic
parent corporation may also take credit for income taxes imposed on
the sub-subsidiary, where the intermediary foreign corporation in
turn pays it a dividend. The rules governing the computation of
credits for foreign taxes are provided primarily in Sections 901 to 905
of the Internal Revenue Code of 1954.
Timing Dividend Distributions
How can the taxpayer take advantage of fluctuation in foreign taxes
in order to get the maximum foreign tax credit through the proper
timing of dividend distributions?
The answer is basically simple: that is, to utilize the 60-day rule
12 THE QUARTERLY